ASIL Insights

            Eight related World Trade Organization (WTO) arbitration decisions issued on August 31, 2004, [1] set the amount of retaliation eight US trading partners (the "Requesting Parties") may impose against the United States for its failure to comply with a prior WTO Appellate Body ruling that the Continued Dumping and Subsidy Offset Act (CDSOA) -- commonly known as the "Byrd Amendment" -- violated WTO rules. [2] In that ruling, the Appellate Body, largely upholding a prior panel decision, held that the CDSOA violated the Antidumping Agreement Article 18.4, the Subsidy and Countervailing Measures Agreement Article 32.5, and the WTO Agreement Article XVI:4. [3]   The reason for the violation was that the CDSOA provides that duties assessed pursuant to a countervailing duty order or an antidumping duty order are to be distributed on an annual basis to the affected domestic petitioners in the case and to those who supported the successful petition, rather than being retained by the US government.

            As a result of the US failure to bring the CDSOA into compliance, eight of the eleven complainants in the dispute requested authorization under WTO Dispute Settlement Understanding Article 22.2 to suspend concessions or other obligations (in common parlance, to retaliate) with respect to their trade with the United States.  Their requests led to the August decision, which is important for several reasons. 

            First, the decision confirmed the long-standing WTO norm that retaliation must be based on the amount of trade damage caused by the law found to be in violation of WTO rules, and not on the extent or nature of the illegality. [4] Specifically, the arbitrator rejected the Requesting Parties' argument that because each disbursement under CDSOA violated the WTO, the total amount of disbursements, rather than the trade impact, should be used to determine the level of retaliation.

            Second, the decision held that the relevant trade damage for establishing retaliation rights is not the total global trade effects of the illegal measure, but rather the more limited impact on the trade of the requesting party. In other words, countries are only entitled to retaliate in amounts equal to the trade effects of the illegal measure on their own exports regardless of the global effects of the illegal measure.  This is so even if less than 100% of the adverse trade effects are countered by retaliation. Specifically, the arbitrator rejected the complainants' claims that they should be allowed to consider not only the trade damage suffered by their own exporters, but should additionally be allowed to allocate among themselves the trade damage suffered by countries that did not participate in the case. [5]

            The decision is perhaps most important for its use of economic modeling and its discussion of the particular methodology used in this case for quantifying the trade damage that determines the level of retaliation. By setting a precedent for the use of sophisticated economic modeling, the arbitrator may have opened a Pandora's box. In future cases, parties are as likely to disagree over the appropriate economic model as they are over the correct legal interpretation of the WTO. In fact, the arbitrator implied that the model chosen was somewhat at random. [6]   On the other hand, the arbitrator's detailed discussion of the formula may provide guidance to future Requesting Parties and arbitrators in crafting and evaluating retaliation requests.

            In order to quantify the trade impact on each of the Requesting Parties of the Byrd Amendment's illegality under the WTO, the arbitrator constructed a complex formula based on the theory that such impact would flow from the displacement of imported products by US goods whose price had been reduced as a result of the WTO-illegal payments, and that therefore the extent of trade damage would depend on (1) the amount by which the distributions would be "passed-through" to consumers in the form of lower prices and (2) the extent to which such price reductions would cause consumers to switch from imports to domestic products (the "elasticity of substitution"). [7]

            Using that formula, the Arbitrator determined that the level of retaliation for each Requesting Party was equal to the amount of duties collected by the United States on that country's exports and distributed to US petitioners under CDSOA for the most recent year for which figures were available, multiplied by 0.72. [8]

            The arbitrator acknowledged that the level of retaliation would vary from year-to-year, but said this was not prohibitedunder the WTO Dispute Settlement Understanding. The arbitrator noted that if the level of retaliation did not increase as CDSOA distributions increased, the United States might not have sufficient incentive to repeal the offending provision -- the ultimate goal of any retaliation.

            Application of the formula using fiscal 2003 figures for the amount of CDSOA distributions would result in retaliation valued at approximately $76 million by Japan, $18 million by the European Union, $3.1 million by Canada, $2.9 million by Mexico, $1.44 million by India, $1 million by Brazil, and $576,000 by Chile. None of the countries has specified when it will begin to implement retaliation.  Many of them remain hopeful that the United States will comply with the earlier ruling and repeal the CDSOA, thereby obviating the need, and the right, to retaliate.

            The Bush administration has said it intends to comply with the earlier ruling against the Byrd Amendment, but has given no indication that compliance would be expedited as a result of the ruling on retaliation. In fact, opposition in the US Congress to repeal of the Byrd Amendment seems to have intensified following the decision. 

About the author:
Eliza Patterson is a trade attorney practicing in Washington DC. She is currently an adjunct professor at George Washington University Law School. She graduated from Harvard Law School in 1972. She can be contacted at erpatterson@Msn.com.